030 | Are You Ignoring Your Most Important Financial Number?

We often put a lot of weight on financial numbers that don’t give any true indication of how we’re doing financially. We learn pretty early on to value these numbers because they’re “important.” But we often ignore the one that matters most.

In this episode, we’re going to talk about the two most common irrelevant financial numbers we tend to focus on and the one that actually matters.

Lightly edited transcript appears after the show notes.

Topics Discussed

• two financial numbers that don’t give any indication of your financial health
• your most important financial number
• how to calculate your most important financial number and why it’s important

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Resources mentioned

Lifestyle Freedom Starter Guide

Episode 7: Budgeting for Lifestyle Freedom and Financial Independence

Episode 9: Why Many Lawyers Struggle to Build Wealth

Episode 17: How to Budget Using the Zero-Based Budgeting Method for Lawyers

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Lightly Edited Transcript

Hey friend. Welcome back to Wealthyesque.

Happy Friday. How’s it going? I hope you’ve had an amazing week.

And I’m looking we are when this comes out two weeks into the new year. So how are things going? Are you staying on track with your goals so far?

If you need help staying on track with your money and we haven’t talked yet, friend, seriously, what are you waiting for? Head to rhothomas.com/coaching. Let’s chat. This is legit fun for me, and I know I can help you, so if you’re stuck, let’s just grab a call and talk about how coaching can help.

Okay. So, speaking of money and numbers and such, we often put a lot of weight on financial numbers that don’t mean much in the grand scheme of things. And I’m going to talk about two of those in particular, and then I’ll share the one that actually matters.

So, the first financial number that does not matter that everybody puts so much weight on is your credit score. How do I improve my credit score? I want an 850 credit score. Did you know it’s possible to have a high credit score and be broke?

Like my husband and I both had credit scores in the low 800s when we were first starting out on our financial journey, and we were over half a million dollars in debt with a negative multi six figure net worth. As in our net worth was below zero. Hundreds of thousands of dollars below zero.

And the thing is your credit score is just a measure of your behavior with debt. It’s not to say that it’s never important, like if you’re applying for a credit card or a loan or something like that, then yes that’s one of the things that the lenders are looking for.

But your credit score measures things like whether you make your payments on time, or how many accounts you have open, the age of your accounts, how much of your available credit you’re using, things like that. It’s not a good indicator of your financial health.

The second one that I want to talk about is income, and yes income is important to an extent. But you hear a lot about having a six-figure income or, you know, just wanting to make more money in general.

And just like with the high credit score, it’s possible to have a six-figure income or make more money and be broke. Again, that was my story.

The issue is, yes, you can have a six-figure income, but if you’re not managing it well, then you’ll have nothing to show for it.

So, for example, if I make $100,000 a year, and I spend $101,000 a year, I’m broke. I’m digging myself into a hole, year after year. But I make six figures, right?

Or if I make $100,000, and I’m saving 20% so you know I’m saving $20,000. But if my debt is accruing $20,000 in interest every year, I’m basically breaking even. It’s still not making progress.

Ultimately it’s not about the income. It’s about the way you manage your income. And so we talked back in episode 9 about why lawyers struggle to build wealth. And a big part of that is the way we manage our money, and just not really paying attention to what’s going on with our money, lifestyle choices that we make, that kind of thing.

And I know I’ve told you this before, but teaching is among the top three professions held by millionaires during their working lives. Lawyers were lower. I think we were like, number 8, or something like that, and doctors didn’t even make the top 10.

So that just goes to show you how money management habits are way more important than the actual income.

So what number is actually important then? It’s your net worth. This is the most important financial number, especially if you’re trying to reach financial independence, which if you’re listening to this show, I hope you are.

But the media talks a lot about net worth with respect to celebrities, but it’s important for non-celebrities, too. It’s a really good indicator of how you’re doing with your money, but many of us don’t pay attention to it, or even know how to calculate it.

Or you might be like me when we were first starting our financial journey and just assume that because you make good money and have a good credit score, then your net worth is good, too.

Like I just knew when we sat down to calculate our net worth for the first time that it was going to be six figures right? But as you know, when we finally calculated it, not only was it not six figures, we were in the hole multiple six figures. It was like negative $342,000 and some change.

And I think a lot of people avoid thinking about or calculating their net worth because it sounds complicated right? It’s something that rich people do.

But if you are going for financial independence, I want you to be rich, right. I want you to have money so that you can take back control of your time and have that true wealth that we talk about.

And so it’s really simple to calculate your net worth. All it is is everything you own, so all of your assets, minus everything you owe, all of your debts, all of your liabilities.

The things that are included in that, for assets, it’s your checking accounts, your savings accounts, your retirement accounts, investment accounts, the value of your home, any other properties you might own, the value of your car, if you have, you know, expensive jewelry or valuable collectibles, things like that, things that have value.

Then on the liability side, that’s your student loans, your credit cards, your car loans, mortgages, personal loans, 401(k) loans, anywhere where you owe money.

There are some differences in how people calculate net worth. Some people don’t include their checking account balance or the value of their house or the value of their car, and that just seems a little bit silly to me because those things do still have value.

I think the argument around not including them is that your checking account balance fluctuates so frequently, and that, you know, your house is not easily liquidated I guess, like you probably are not going to sell your house as quickly as you might liquidate some of your other assets. And then with your car, it’s a depreciating asset, meaning that the value of your car is going down.

But either way, those things are items that you own that have value, so it makes sense to us to include them in our net worth and we do.

You don’t have to get into super granular detail, like you don’t have to go through and appraise every item in your house or something like that right. We just keep it to the main items of value: accounts, the value of your house, the value of your cars, things like that.

And the reason that this is important, why net worth is important is, as I said before, it is a really good indicator of your financial health. And if it’s increasing over time, then that suggests you’re making good decisions, and you’ve got some good habits going. If it’s decreasing, or if it’s staying the same, then you’ll want to make some changes.

So what can you do to increase your net worth? There are two ways to increase, and that is increasing the value of your assets or decreasing the amount of debt you owe, or both. So, you know, three ways if both counts as a separate way.

With both of these things the magic comes through controlling your cash flow, which starts with your budget. And you can head back to episodes 7 and 17 to hear more about budgeting.

But when you know how much you have coming in, and how much you have going out, then you can redirect that extra toward the things that increase your net worth like saving and investing more, paying off debt, that kind of thing.

So, we hit a positive net worth at the beginning of last year, primarily by paying on our debt aggressively over the last four years. We invest a small amount, about 3% or so, into our retirement accounts to get the match from my husband’s job. And then we also save and invest a few $100 a month for our kids’ college fund and a separate investment account. But everything beyond that goes to paying off debt right now.

And that has really helped us to increase our net worth, even though we are not actively aggressively investing, we’re still seeing returns on the investments that we are making so those accounts are the value of those accounts is increasing. And then the debt, as aggressively as we’ve been paying it off, cutting that down has helped us to really increase our net worth, as well.

And then I kind of mentioned this already but aside from those active things like saving and investing and paying off debt, if your accounts are earning interest or if the value of your property is increasing, that will also help to increase your net worth. That is a passive way to increase your net worth.

And of course when I’m talking about investments in that context, I’m talking about investing in the stock market, which I’ll get into more in another episode. And then I should also mention that investments in the stock market can dip at times, but over time the market, always goes up.

So, you know what net worth is, you know how to calculate it, why it’s important, how to increase it. My last tip is to track your net worth over time to make sure it’s moving in the right direction.

As I said before, you want it to be increasing. It might dip at times because of market dips, or things like that, but over time it should be going up.

For the last four years, we’ve calculated our net worth around the same time each month, and we keep a record of it so we can go back and see our progress. You can get the exact template we use to track our net worth at rhothomas.com/networth, and “net worth” is all one word.

Okay, so there you have it, everything you need to know about your most important financial number, and why other numbers we often use as a proxy for financial success are actually irrelevant.

So if you don’t already have a system for calculating your net worth, go ahead and grab my network tracker and calculate it today. This will be your starting point, it’s your baseline and just keep tracking it over time and as you move forward. Make sure that the number is increasing each month.

And if you’re not sure where to start, or you just need a little help with getting yourself organized with your money, head to rhothomas.com/coaching. Let’s chat about how I might be able to help.

Okay, so let’s recap.

1. We put a lot of weight on numbers that don’t tell us much about our financial health, such as credit scores and income.

2. Your net worth is your most important financial number. It’s a really good indicator of your financial health.

3. Calculate your net worth by subtracting the value of everything you owe, your liabilities, from everything you own, your assets.

4. You can increase your net worth by increasing your assets, decreasing your liabilities, or both.

5. Track your net worth over time. If it’s increasing, you’re on the right track. If it’s decreasing or staying the same, you might want to switch some things up.

So that does it for this week’s episode of Wealthyesque. Come on over to our private Facebook community, The Wealthyesque Community, and just let me know if you are already keeping track of your net worth. If not, let me know if you’re going to start after listening to this episode. You can find us at rhothomas.com/community.

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Okay, friend, as we close out, I pray that you will take some time to calculate your net worth and get a good sense of where you stand financially.

I pray that you will stop putting your focus on irrelevant financial numbers that may sound good, but don’t mean anything with respect to your overall financial health.

And as always, I pray that you continue to take steps to regain control of your time, build wealth, and live the life of freedom and choice you deserve.

Talk to you later.